Mexico’s proposed higher mining royalties could block nearly $7bn in investments
The Mexican government proposed raising mining royalties under the argument that metal prices have risen in recent years.
Until a few months ago, Mexico was one of the rare countries left in the world that didn’t charge taxes on mining production or profits. But a proposed 7.5% tax on resource companies, and as much as 8% for gold, silver and platinum miners, is scaring investors and small players away.
The country, which ranks fifth globally in terms of mining investment and fourth in exploration spending, currently taxes miners 30% of their revenue. And that regime had been working just fine, with mining investment expected to hit a new record of $8 billion by the end of the year. But that was before the bill came on the scene.
Earlier this year President Enrique Peña Nieto introduced a plan to bolster Mexico’s feeble tax haul that alarmed miners. The reform focuses on reaping more income tax from higher earners, closing corporate loopholes and widening the tax base.
As part of the restructuring Mexico’s Congress voted in favour of passing a 5% tax to redistribute miners’ profits to the states and municipalities where they mine.
The bill, originally due for a Senate vote in coming months, was later to fold into the government’s fiscal reform, which increased the proposed fee to 7.5% of earnings before interest, taxes, depreciation and amortization (EBITDA).
While the planned tax may not be a major challenge for mid-tier miners with established operations, Haywood Securities analyst Stefan Ioannou told BNamericas it would definitively be “prohibitive” for many smaller players, which rely mostly on high-risk seed money.
The new ruling would have even more critical outcomes if combined with plans to force mining firms to actively work on their concessions, as it would increase per-hectare fees for concessions left inactive for two years or more.
Analyst have pointed out the timing of the proposal is awkward, given the recent drop in metals prices and production.
The country’s national statistics agency (INEGI), recently reported that overall mining output fell by 2% in the first six months of 2013, compared with the same period the previous year.
Mining companies Industrias Peñoles SAB and Fresnillo Plc (FRES) would suffer the most should the legislation pass, while Grupo Mexico SAB would be less affected as it has activities outside of the sector, according to an e-mailed report by Citigroup Inc.’s Banamex unit.
Mexico’s mining industry employs about 334,000 directly, with 2 million people employed indirectly, making the sector the country’s fourth largest industry in dollar income, behind cars, oil and electronics.
If approved by the senate, the new mining tax will be implemented as early as January 2014.
Image by Randal Sheppard
2 Comments
Tom Smith
Mining management still do nothing about the paper ETF silver price management. So, why shouldn’t Mexico just take it over? First 7.5% then soon 75%? It was the results of the CFTC investigation that gave the green light to kill Junior Mining.
The US Debt Ceiling being raised could easily cause the US Dollar to fall 10%, yet the paper gold/silver ETF can keep prices where ever they want. Mexico can take mining over then sell it to China for a huge profit. No surprises here. At least Mexico is being honest about what they are doing. The US paper ETF management is the real reason Junior mining will hand over their mining shares for nothing.
Sven
“Analyst have pointed out the timing of the proposal is awkward, given the recent drop in metals prices and production.”
All national currencies are at risk as central banks lose credibility with their profligate monetary policies. Is this the beginning of a trend where nation states will try and crush investors perceptions that gold and silver are too volatile and dangerous to own?
That would be a dangerous game. Perhaps they’re trying to recover lost revenue from different projects getting moth balled?